Supplement 01 Sep 24 - Back 2 Skool

“Education is the most powerful weapon which you can use to change the world” - Nelson Mandela, former President of South Africa

Before we get started, get those tickets bought for the next Property Business Workshop - Tuesday 1st October is the one! This time round we will be covering Exits - with two main objectives. Firstly, planning your own - which people do very poorly, in my experience - and secondly, so that you can understand other people’s exit plans (or lack of them) and assist with them when looking to buy a portfolio, or a business. Help the vendor get what they want, need and deserve - and work towards true win-win situations. As always it will be an action-packed, content-filled day which will stand alone in helping to advance your understanding as a Property Business Owner!

The link is LIVE and Early Bird tickets, with a 10%+ discount, are available now in limited numbers and are on sale for a few more weeks: bit.ly/pbwfour?

Welcome to the Supplement, everyone. Into the last third of the year, the third quadrimester if you prefer.

Lots to discuss this week as usual - in the deep dive I wanted to cover a Hamptons report that has been lost in the least quiet quiet summer I’ve ever had regarding BTL purchases falling to a record low - and a look at some TwentyCi analysis which does a great job at putting some of the data into a proper contextual format. The gear change is slow to say the least - and in the past few days we learned that housing starts were down 34% to under 30,000 in Q1 of 2024; with completions in the year to March at 183610. That 370,000 must feel like a long way away - BUT, they are indeed starting from a low base. We will have a squizz at the ONS report too.?

Before any of that, though, I’m pressing on with the real-time market analysis. Kudos as always to Chris Watkin who delivers week in, week out on these, with some bonus content too sometimes. Plenty of listings still - 35k across the UK as we gear up for what’s usually a busy period. Still maintaining that >7.5% difference from pre-pandemic.?

Net sales still also outperformed - 34% higher than the equivalent week in ‘23 and nearly 15% higher than the pre-pandemic market for the same week.?

The average listing price was up a couple of percent vs last week, as the market smells blood and also knows that September has come - but still new listings were around ￡407.5k average compared to the average 2024 listing price of nearly ￡440k. The market looks reasonable value still, though, and I am seeing some retail transactions happen and thinking “that’s a bargain” which I VERY rarely do. A good time to be moving residential property, I’d suggest.

Before I get into the macro, I just wanted to note the SCREAMING for October 30th that is now going on. You can’t move for people wanting to exit within the under-2-month timescale, after the Grin Reaper, Mr Starmer, spoke this week in a wrist-cutting soliloquy. All I keep seeing is a mistake about manifesto tax promises getting compounded time and again. The new rhetoric has shifted to allow taxes on EMPLOYERS to go up - Employers’ NI is in danger and hospitality and retail will be CREAKING if that is what goes on. IHT, CGT, Pension relief - they MUST be going up (or down, in the case of pension relief) - this really is a “Meatloaf Moment” where “two out of three ain’t bad”. Don’t get mad - get even. CGT - just refuse to sell anything. IHT - just don’t die (that one is harder). Or marry someone an awful lot younger……..

Get yourself in shape to perform rapidly, and give the vendors what they want and need. There’s no motto in my office on the walls - but if there was, I reflected this week, it would say “never discourage a keen vendor”. As ALWAYS, the fear will be worse than the event itself, but as I write this, a poll I’m running on my LinkedIn has “Leave the UK” as the most popular option to cope with the tax rises that are coming. I’m sticking with Keep Calm and Carry On, don’t worry.

The macro, then. We had the Distributive Trades index, the Nationwide House Price Index, the Bank of England Money and Credit Report including the money supply, and you KNOW we are going to round up with the gilt and swap yields.?

Distributive Trades. A brief reminder - produced by the CBI (Confederation of British Industry) - a survey around retail sales volumes. It was another negative print (-27) - an improvement on the horrific July number of -43 but still well below consensus. Selling price inflation looks to remain below the long-term average next month - where it already is - in one bit of welcome news.?

Sales were poor for August, and retailers expect to further reduce investment over the next 12 months. Retail employment is contracting for the majority of survey respondents as it has done for 8 quarters in a row. The CBI Principal Economist, Martin Sartorius, put out a hopeful quote:

“The sector will want to see measures in the Budget this autumn to give certainty to firms and incentivise investment. Reforming business rates, introducing a business tax roadmap, and changing the apprenticeship levy would help businesses to deliver on the government’s ambitions to supercharge the economy”

Martin’s doing his job there - fair play to him. It’s worth a pop. What WILL come good from the Iron Chancellor’s Scythe of a budget (I’ll stop calling it that soon. Probably. Or we will have 2 months of it. But - let’s consider expectations managed).?

Volumes in EVERY retail sector have contracted and are contracting. The B2C or Consumer market is a very tough one right now, however you look at it. Room for improvement in the future you’d think.

Nationwide next - and how I enjoy their numbers. After finally coming round to the market, 6 months+ after Supplement readers, last month, they then saw a 0.2% contraction in August. You might think this is standard for August, but these ARE seasonally adjusted figures.

They led instead with a headline about ANNUAL house price growth as that did improve to 2.4% from 2.1%. We won’t remind them that back in December they were forecasting “another small decline in low single digits or remain broadly flat” - although I just did, of course. They still see prices about 3% below the summer 2022 prices on their numbers.

There’s some interesting data deeper in their report this month, though. They take a look at price premia for energy efficient stock - or, reframed, significant price punishment for energy-leaky stock.?

A or B rated properties tend to trade now at a 2.8% premium (compared to a D-rated property) - around C - E there is very little difference - and F/G properties (not allowed to be used as rentals of course, although there’s plenty of people that still isn’t stopping) are trading at a 4.2% discount to a D. (that’s pretty meaningful, let’s face it).?

These numbers have moved a little since 2019 - when the premium was 1.7% not 2.8%, and the penalty was 3.5% not 4.2% - so, the market is - very slowly - waking up. We would really want to know how much of this was changed after the utility pricing in the winter of ‘22, to see if that really started to shift attitudes and willingness to pay.

If you are like me, you might read those stats and think - hold on, A and B properties tend to be newer build - but Nationwide have thought of that and control for it, we are told (we have to take that at face value). 48% of housing stock is now rated C or higher - up from 18% in 2012. That should be lauded as an incredible achievement, to be honest.?

New builds increase that by 1% per year alone, if that. So it isn’t just 12 years of new builds making that difference. The average cost to get to a C was ￡7,400 apparently - with E to G costing ￡13,500 on average versus Ds which on average cost ￡6,200.

Interesting and timely with the reintroduction of the notion of EPC targets of C for the PRS by 2030. A landlord survey this week revealed that 95% of landlords think this is “impossible”. And, indeed, it will be - although the rules will be fudged of course. There are already fudges - listed buildings being one. There will need to be a provision for leasehold, even with reform bills, unless legislators are idiots. There’s really quite a limited amount of measures you can take within a flat, certainly in some flats with certain types of freeholders!

Now a monthly favourite of mine - the Bank of England Money and Credit Report. These are July’s figures, produced a month in arrears. Most look at the number of mortgages completed - and that’s a good gauge of the health of the market - but there’s plenty more richness in the data if we dig a little deeper.

62k mortgage approvals is the highest print since September 2022 where it was over the magic 65k, which I’d see as a sign of a really-quite-healthy market. Remortgages fell back to 25,100, which is fairly low (more typical to see the number around 30k). Private companies paid back 3.6bn of finance - although 2.3bn of this was net equity buybacks (which, personally, I wouldn’t count with too much vigour - but it is technically finance of course).?

The money supply also moved up a little, although the expectations were higher - we are still lower than October 2022 when quantitative tightening really started (some other stuff happened too, I don’t talk about it much but you might remember “very thin Lizzy” and her reign/shower). It was below consensus but still up 0.3% month-on-month, and “money tends to find a home” as the monetarists say. Not really looking consistent with 2% inflation just yet.

As we get deeper into the mortgage stats - we saw an average drawdown rate of 4.81% in July, which wasn’t much different from June, but as at today - looks expensive. What a difference a few months makes. The outstanding debt stock is now averaging 3.69%, creeping closer to that 4.81% rate which will crater within a couple of months. Credit card borrowing is still growing 10% year-on-year, but it is not overly worrying as the sector is still repairing from massive paybacks during the pandemic.

So - a healthy buying month in July 2024 by the looks of it, and many were perhaps waiting to remortgage when they felt the Bank of England might cut rates in August as indeed they did! I will be watching this report next month with continued interest.

The gilts and swaps - the staple. The 5y gilt closed Thursday at 3.795% and Friday at 3.816%, and the 5y swap closed Thursday at 3.704%. We opened the week at 3.777% on the 5-year and so it was another tiny up-week with little news of consequence, based on a short week thanks to the Bank Holiday.?

9bps of discount for the swap looks back to standard, for 2024 anyway. Still leaving our best-guess 5-year mortgage money for limited companies at 5.7% or so, or equivalent after fees are amortised.

Great. Hopefully we can trend DOWN on the swaps and gilts next week rather than creeping back upwards.?

Onto the bigger soapbox, and this week is all about Exodus. No - not the second book of the bible. Indeed, it is more than Exodus, because it is also a lack of replacement that should be concerning those at policy-making level. I’ve often praised the quality of Hamptons research - they are so much more sensible, and less dramatic - and much more realistic, than some of their rivals I could name. They lead with the headline “Buy-to-let purchases fall to record low” - so you can see they are not going after the Exodus side, but the replacement side.

They frame what you might expect, quite nicely. “Tax and regulatory changes since 2016 have been the main culprit, but these disincentives to invest have been compounded more recently by higher interest rates and political uncertainty around the threat of more rental reform.”

Very good. Needs evidence of course - which they are normally quite good at. Some of that can only be provided by survey, of course - and how do you survey those who didn’t do something, accurately? Not easy. I’m always suspicious of surveys about intention rather than action, too.

There are a number of ways that various portals and agencies measure landlord sales and purchases that we can get into. Hamptons are a large organisation, but heavier in the South and East and so that does need bearing in mind.?

They have produced - from their own internal figures - a graph running from 2010 showing sales versus purchases for landlords. The lines crossed rapidly after the 2015 budget - this can be no coincidence. 16% of homes sold by Hamptons were bought by private landlords in 2015 - this dropped to 13% in 2016 and then to 12%, 11% - had a brief resurgence in 2021 and 2022 as people speculated with stimulus money and eye-wateringly cheap rates - and has now in H1 of 2024 cratered to 10%, the all time low over 14 years.

In the meantime, in 2010 private landlords only represented 4% of all sales. The sector was still really young, back then, measured by the introduction of the buy-to-let mortgage in 1996 (other metrics are viable, of course, but that’s when the explosion started). This hit 16% in 2016 (ahem) and stayed there, although has dipped and risen a little since. At only 13% in H1 2024, as many have not sold - but although I have used it as this week’s graph, it is more insightful to visualise the difference between 2010 and 2024 H1 - by subtracting the % of sales from the % of purchases, which gives you a great idea on the direction of travel in the sector:

2010: Net 10%

2011: Net 7%

2012: Net 7%

2013: Net 5%

2014: Net 2%

2015: Net 1%

2016: Net -3%

2017: Net -4%

2018: Net -5%

2019: Net -3%

2020: Net -2%

2021: Net -2%

2022: Net -4%

2023: Net -3%

2024 H1: Net -3%

Or - we could aggregate those. By 2015 32% more transactions, net, had been purchases of buy-to-let property rather than sales. Since then, 29% net transactions have been sales rather than purchases.?

The direction of travel is worryingly clear. The English Housing Survey - which you would expect to have superior data - would dispute the clarity of this pattern. However - as I say, when you consider it is likely London/SE heavy, this does make sense. The period of meteoric growth and speculation came to an end in London in 2014/15/16 depending on which part we are talking about, and you’d expect investors to therefore have become net sellers - and even more so once the tax changes and the interest rates have kicked in.

Hamptons also tell us that the investors who have actively bought a buy-to-let this year are mostly cash-rich, larger-portfolio landlords who continue to expand their portfolios.

If H2 replicates H1, there would be 113,630 new BTL purchases in Great Britain - 75,900 or 40% fewer than in 2015.

The regional figures largely bear out my accusation of Hamptons being South-East heavy but they confidently predict and share figures for all regions. But the real illumination on the regional figures is Scotland. Draconian rent controls have seen investors vote with their feet with only one in 20 or 5% of transactions being for buy to let in Scotland. Plus - the 6% ADS (additional dwelling supplement) puts off even the most ardent, for ideological and practical reasons. There isn’t room in the transaction for the vendor and the purchaser to share that burden. Scotland at 5% is lower than London at 8% and indeed lower than any other region.?

The East and West Midlands charge on at 13% and 15% of transactions, but they are 5% and 6% lower respectively than the numbers in 2015. I should note at this point that the 2015 market was overbought and overrepresented by BTL landlords - so it should not be our benchmark - but what you noticed at that time is that rents were progressing upwards very slowly - less than wage increases, and less than inflation. Would it be terribly presumptuous to suggest those two phenomena were related?

London’s 8% is down from 17% in 2015 - the largest drop on the books. Sunderland and Middlesborough specifically are seeing a huge influx of capital with 45% and 43% of transactions respectively being for BTL. Yields AND capital growth prospects look great - but rent growth on those figures looks quite unlikely……Derby comes in 3rd at 32%. The mighty Derbados.

Hamptons see yields at 7.3% - 1% better than 2015. Unfortunately - of course - the mortgage rates are 2% higher than they were in 2015, so all is not as good (plus limited company higher mortgage rate “tax”, higher cost of delivery, etc. etc.)

Hamptons also point to the 3% SDLT surcharge in 2016 in England as cooling the market considerably, which makes perfect economic sense. Hamptons claim - if the trend for H1 continues - that 146,060 homes will be sold by landlords across Great Britain this year - making the net effect on supply since 2016 a loss of 328,750 rental homes. A sobering number.

Build-to-rent HAS filled some of this void. Around 90,000 units at the last count. You can see that’s still nearly a quarter of a million rentals gone - and MORE renters since 2016, not fewer - by some margin.

There were 42% fewer rentals on the market in June 2024 compared to June 2016.?

Scotland is at 39 months in a row where annual rent inflation is up 5% or more.

Those “truth bombs” if you will are supplemented by a press release which took the other side of the argument, released this week.?

22% of newly listed homes in inner London are former rentals, according to TwentyCi - the highest in 10 years, up from 15.6% one year ago. Their recent collaboration with Cornerstone Tax on the issue was quoted as claiming there is an Exodus of landlords from the capital and the South East, looking towards the North East of England instead. A “safer” investment than the capital, with the highest growth in property prices in the last 12 months. Their words, not mine…..

TwentyEA added to this debate with the bombshell that in June 2024, 18.4% of all properties listed for sale had also been listed for rent within 3 years prior to the sale listing (this is a common measuring stick that the portals and data aggregators use - sometimes they use 5 years rather than 3). This in numbers was 28,000 properties and 100.6% higher than in June 2023 - and also 34.6% higher than June 2019. Month-on-month, it was also 27.4% higher.?

Election speculation you’d think - that’s now turned into a capital gains tax speculation “frenzy”. That word - used by the FT, of all papers - the only one you’d really respect using that word! This is serious on supply and is going to lead to a mad 2025 and beyond for tenants. This will take years to repair; favourable market conditions - and it’s highly likely Labour have other plans (even if they don’t today - apart from the Renters’ Rights Bill of course).?

Read and consider - bearing in mind, one more time, that the rental demographic is most likely higher than ever before, simply because the population is higher than ever before:

Available properties to rent are at their lowest since TwentyCi has been recording data in the last 15 years - 276,000 in July 2024 for the whole UK (compared to 369,000 in July 2019).?

What I’ve noticed at the coal face is quite incredible. I have NEVER seen rental properties at the (high) standard that they are today. There are a variety of areas - we are constantly assessing rental comparables, potential purchases, and the likes - where 5 years ago rent would have been ￡500 for a 3 bed-semi. There is now NOTHING on the market within 3 miles (and I’m talking population dense areas, suburbs, etc) - and what is there is a great standard, but ￡1000 a month and upwards. The market rent for that 3-bed is now hard to determine but you’d think a “kind landlord with a mortgage” still needs to be getting that up to ￡750, and a ruthless profit maximiser will be saying ￡900.?

The numbers and averages hide this. Precisely zero of that available stock is affordable, useful or pragmatic for a family on the median wage. You’d need 36k from an affordability perspective to afford 12k rent (outside London/SE on the traditional metrics). That might be roughly the UK median wage right now, but not in the area I’m thinking of (South Yorkshire, as it goes).?

That leaves us with the ONS house-building data, which I suppose the Government technically quite enjoyed, on Thursday - one of the last things (they’ve got a quarter or more of it left yet) that they can blame on the previous administration.

UK Housing starts - the third quarter in a row under 30,000 starts. The past 9 months have seen 82,690 housing starts. April to June 2023 was anomalously high because of building regs changes in June - but nonetheless, when that drops off we are likely to be left at a number around 110-120k housing starts for the past 12 months. We will know in 3 months time. If that number is right, it will be the worst year for housing starts since 2009, to put it into context.?

Completions - perhaps they are better? Yes, they are. These terrible figures on starts will work their way through of course. The past 12 months though - 183,600. 200k more on top will be what’s needed to hit the aggressive 370k target in any of the 5 years upcoming.?

For context though - we averaged 150,000 completions per year between 2009 and 2016. There was repair after that - which obviously then collapsed around the pandemic.?

You can’t finish what you haven’t started, of course, unless you are cooking the books - so until at LEAST mid-2025, completions will not start looking anywhere near acceptable based on the target figures. They have to come up from here, and to come up, they have to start. The new “task force” will sort it out, I’m sure. Not really. I’m sure they won’t. But the new administration is starting from such a low base, here, that the only way is up. It just isn’t up to 370k per year.

And that’s the macro housing picture at the moment. Fewer available rentals than any time in recent living memory. Fewer new build starts than for 15 years. Completions 20% better than most of the last decade, but still woefully inadequate. Imagine a REALLY hostile budget, or Renters’ Rights Bill. Or both. I hope those in power understand they hold the fate of millions of tenants in their hands. We - Supplement readers and listeners - will be OK, because we will of course Keep Calm and Carry On.?

So - as always, feedback is very welcomed! Don’t forget you can still BOOK your Early Bird tickets for the fourth Property Business Workshop of the year at https://bit.ly/pbwfour on Tuesday 1st October!!

There’s only one way to deal with all of this continual noise and the fastest unwinding popularity rating (SUCH an oxymoron for a politician) - Keep Calm, ALWAYS read or listen to the Supplement, and Carry On!